Wednesday, November 23, 2011

The extraordinarily talented Lexing Zhang is back in Miami as part of her ever-churning cycle of life as an art troubadour. Lexing, my client and good friend, is a Chinese contemporary art broker based in Shanghai and Paris, and she's back for next week's Art Asia (during Art Basel) at Midtown Miami, right around the corner from our Biscayne office.

With half as many featured Chinese artists in four times the booth space she had last year, this year's collection by Art Lexing offers three very different contemporary Chinese artists using different media and creating a compelling contrast with each other, mirroring the traditional elements of today's uber-urbanized China. Take a look at the attached press release and come see us at Art Asia, I'll be manning the booth with Lexing for much of next week! Download ART LEXING presents Quentin Shih at Art Asia Miami 2011_November 2011

Tuesday, November 15, 2011

I’ve been trying for a few months now to explain to my Regional Center and EB-5 Project clients the nature of “hot money” in China, and why I believe we in America have a unique opportunity right now to drive EB-5 capital to our shores. In the past three weeks with Sharon, traipsing through a half dozen Chinese cities, presenting dozens of seminars for Lake Point EcoVentures, and speaking with hundreds of investors, I’ve been able to go a little deeper into this subject. This blog entry will attempt to convey what I have learned but I will begin by warning you: this will only be of interest to those of you contemplating EB-5 financing for your project.

“Hot money” isn’t bad like it sounds. The Federation of American Scientists (FAS) has a great article on "hot money" in China here. Originally referring to the massive foreign investment entering China from abroad, within the context of current Chinese economic reality, “hot money” refers to perfectly legal, properly earned capital which is “hot” only because it has nowhere to be invested. Whether foreign or domestic in origin, China is overflowing with investment capital, and it's getting worse.

Consider the real estate market in China as an example of the problem: when the Chinese real estate market started to become a speculative mine field racing out of control, the government stepped in and did a number of things which we in America would consider, well, un-American. Things like mandating strict policies to prohibit real estate speculation and forcibly cooling sales to drop housing prices. A notable policy differentiation from our own on Wall Street, i.e., fabricating catastrophic, interest-only mortgage structures, inviting buyers to fabricate income levels, creating a mythology of infinite appreciation, marketing directly to greed (“get in now before prices go UPUPUP!”), and fueling rampant speculation by the uber un-savvy… ultimately leading to the collapse of the American financial system. (Look, folks, I’m not advocating the Chinese alternative to a truly free market but let’s be honest here: freedom comes with a price. If instead of kowtowing to Wall Street’s ludicrous reassurances our government had even SLIGHTLY “taken over Wall Street” way back when the you-know-what hit the fan, things would be pretty different today in America. Despite our chuckling, Gordon Gecko was wrong: greed isn’t good.)

China’s Premier Wen Jiabao reiterated Sunday:

“We would like to stress that there is no possibility of loosening the real estate policies. Our target is to let the property price fall to a reasonable value.”

And therein, as David Carradine so beautifully put it in Kill Bill, lies the problem: no investor – Chinese, American, or Martian – wants their government to decide what is “reasonable” in a free economy. As a result of this policy, China’s real estate brokerage industry is starting to look like ours (figures taken from November 8th China Daily) :

Shenzhen’s mighty Centaline announced Thursday that it is closing 60 offices and laying off of 1000 workers;

Century 21 China shuttered 34 offices in the first half of this year and more since.

Beijing’s Geland closed 50 offices in February when the government had last stated that the policy would not be lifted;

The sale of pre-owned homes has dropped nearly 50% on an annualized basis.

How about that? All roads lead to Rome, it would appear, regardless of who’s in charge; alternatively, no matter where you go…there you are. Like the hunting of deer to cull overpopulated forests, the Chinese government is culling the real estate sector until it returns to a “reasonable” state. And so, while the poor Chinese RE industry is culled, investor funds pool into “hot money” as RE investment opportunities become increasingly scarce.

If there is one thing we have learned about China in the past decade, it is its might. Like the concept of a “benign dictatorship”, one party rule, like it or not, is infinitely more effective than democracy when it comes to fiscal policymaking. And so their Premier is unapologetic in his explanation about their RE investment policy…while we sit around wondering how many butts have been pinched by the clueless-that-he’s-doomed Mr. Cain. NOT effective.

The reality is this: more than one quarter of affluent Chinese families wish to emigrate to the U.S. or Canada, primarily to insure the futures of their children. I’ve spoken to a TON of these people in the past few weeks, and they all say the same thing: “Give us a fair deal and we’ll come to America”. Frankly, after learning specifics about Canada’s progressive investment residency program from our new partners in China, our EB-5 is a Yugo to their Jaguar (or “Jag-YOU-are”, as the blokes would prefer us to pronounce it) but, thank goodness, America is still America…first choice.

Nature abhors a vacuum and the vacuum in real estate investment opportunities in China demands equilibrium from alternative sources. Our EB-5 opportunities, fair and reasonable ones which protect the investor by limiting risk, are the first option for these investors. But, for the most part, American EB-5 projects are more about shiny marketing materials, colossal projections, and nebulous exit strategies into which no wise investor – Chinese, American, or Martian – would ever park a single dollar.

At this point in history, it appears to be China’s turn to open their wallets and invest in the world, and God knows that America and Europe’s futures depend significantly on that kind of financial firepower. But if you are looking for Chinese investment dollars, know that a healthy pragmatism precedes even the most voracious interest in foreign investment...especially with the lame EB-5 projects they've seen and are still seeing. As long as Sharon and I can take them fair deals and look them square in the eye, we’ll be racking up miles over the Pacific.

[Fraud Warning: in the preceding days, I have learned of at least one California real estate broker as well as of several unscrupulous Chinese brokers who are marketing the “buy real estate, get a green card” concept despite it NOT being law. Please be careful out there!. Sharon will soon be joining me on Immigration Insider with her Chinese language blog and she’ll be covering this issue but in the meantime, I ask our Chinese-American readers to convey this warning to folks back home: buying real estate will NOT get you a green card under current U.S. law!]

When the third breathless realtor friend called on the same day, I just had to laugh: here I was a day away from leaving for my long Asia trip and was again explaining the difference between the introduction of a bill to Congress and the process of how a bill becomes law. In a stalled real estate market, even intelligent U.S. brokers can be thrown out of whack by well-intended but most likely doomed legislation. And as Sharon and I would find out during the China portion of our trip, rumors spread quickly in this EB-5 world of ours.

I am speaking, of course, about S.1746, the recently introduced bill which proposes to solve the American real estate crisis by offering green cards to foreign investors who simply buy a home in the U.S. While the proposal has many merits and would certainly jump start the U.S. economy, there is one consideration which the press seems to have totally overlooked: the political price to pay for such legislation to actually become law, however noble and bipartisan its origin.

History Lesson

When the EB-5 became law via the Immigration Act of 1990 (IMMACT90), I got at least as giddy as my realtor friends did over this proposed bill just a few weeks ago. I believed it, too. “Finally”, I said, “America has created intelligent legislation to promote foreign direct investment”. I remember filing my first individual EB-5 – remember, it would be several years before the Regional Center and TEA concepts would be introduced – on a makeshift application form because the I-526 had not yet been invented. (Conjures up images of me in a Flintstone-esque fur suit chiseling away on a stone tablet, doesn’t it? Yabba dabba doo…). In fact, those of us in AILA who even knew what “investment-based immigration” could potentially mean back in 1991 were terrified that the initial numerical limits imposed by the EB-5 Pilot Program would vaporize in a nanosecond, a la H-1B not so very long ago, when programmers roamed America freely and the H-1A existed to admit still-desperately-needed geriatric nurses into the U.S.

That fear of visa exhaustion is what vaporized, not the visa numbers: INS (USCIS’ predecessor agency) promptly implemented EB-5 operating regulations with all the intellect, tact end efficacy of a karaoke evening with a drunken Roseanne Barr. The disclosure requirements were completely unworkable for any prospective EB-5 investor who had earned his or her money in any way other than inheritance. So, with one stroke, INS eliminated both Congressional intent AND the hope for a financial vehicle toward U.S. permanent residency; it would be a decade before things EB-5 would begin moving in earnest .

But there was more to the problem than the horrific rulemaking: the INS rules stood firm for a simple reason: there was no political pressure for INS to fix the rules. You see, many, MANY Americans took issue with the notion of “selling” green cards! I remember the CNN debates vividly: certain folks of various political persuasions had no problem allowing labor certification, National Interest Waivers, etc., but firmly resisted the notion that “America is for sale” (as I remember one pundit saying.) I was beside myself with frustration: for decades prudent, developed nations such as Canada, Australia, and much of Europe had direct investment-based permanent residency options. We were willing to allow people in and stay based on job skills (labor certification), “extraordinary ability”, etc. but somehow, the notion of attracting proven investors and their wealth to U.S. shores seemed, well, unpalatable. Something which might make Lady Liberty blush. The sole battle cry which let the EB-5 visa become law in the first place is the same battle cry keeping it alive in “pilot” phases and the same battle cry which will, in the next two years, make it a permanent part of our immigrant visa arsenal: America needs jobs.

The rationale of the first two above is, IMHO, the only politically arguable basis which keeps the EB-5 alive and therein lies the problem: if you remove the job creation element from an investment-based green card, then you are out of political bullets. This proposed, admittedly-desperate bill to give permanent residency to folks who buy U.S. property won’t fly.

Consider the upcoming elections in Washington: just who exactly will make this new proposed bill law? The Democrats are clawing to stay on the side of an increasingly slippery iceberg; what do you supposed their core, labor-based constituency would say about lifetime permanent residency awarded to anyone with money? Even if the Dems did it, would the President put his Barack Obama on it and make it law? Both the extreme right and the xenophobic middle would have a field day on the “selling visa” angle and seal his reelection doom. As far as the Republicans: with the Tea Party movement, is there a single living Republican who will survive reelection if they support the “buy a house/get a green card” legislation? Don’t think so. It is sad to say but I believe that America has years of self-examination and painful lessons to learn before we collectively understand as a nation that it isn’t a “bad” thing to invite successful immigrants into our country to help us get out of the mess our careening spending spree of recent years got us into.

Thursday, November 10, 2011

Given the typically "unglobal" American world perspective, many U.S. ventures seeking EB-5 capital approach guys like me with the mistaken presumption that “it’s all about America”, that is, that U.S. permanent residency is so coveted that even the most fiscally-flaccid EB-5 offering well nonetheless be well-received abroad. Let me clarify that error: it’s all about opportunity.

While Canada and countless other nations are working with China to channel their giant cash reserves toward their borders, the U.S. -- both the USG via its slo-mo fulfillment of promised Premium Processing for EB-5 and, even more so, the private EB-5 purveyors flooding the Chinese market with questionable ventures -- squanders this staggering opportunity to recover economically. The combination of a weak global economy resulting in reduced manufacturing demand from China and the Chinese governments continued ban on speculative real estate investment have combined to make wealthy Chinese families eager to export their capital; their appetite for a better life for their children – which is, according Sharon, the quintessential dream of every Chinese parent – must be satisfied abroad. Right now, a number of elements, of stars aligned, is ideal, and this opportunity will not last forever.

According to this week’s projections by Ernst & Young, Chinese investments overseas will grow between 20-30% in the next two years. Already the single fastest growing source of foreign direct investment (FDI) in the U.S., (according to the U.S. Department of Commerce), the potential for EB-5 capital from China is staggering: I can tell you that while the major urban markets are congested with EB-5 promotion, our most surprising success on this past tour has been in secondary markets. In fact, the majority of our agent partners in China are brand new to EB-5! As skeptical and worried as I was until just a few years ago, the most ethical agents in China have stuck to other country programs for fear of misdirecting their clients into yet another EB-5 scam. Consider the facts that the best agencies are only now delving into EB-5 and that but a small fraction of potential SEC-compliant accredited investors in China have even heard of EB-5…and you will conclude as I have: we are but the tip of the Chinese EB-5 iceberg.

But these remain treacherous waters and seeing the Missouri, Victorville, and El Monte EB-5 projects sink like the Titanic has made for a wary Chinese market. Not a cautious one, a downright scared one. Because most of us marketing EB-5 are not giving the Chinese what they want. So...what DO they want?

Well, for one thing, they want real job numbers. Barry Johnson, the Executive Director of the U.S. Commerce Department’s SelectUSA, recently stated that from 2003 to 2011, $7 billion in Chinese-funded green-field projects had generated some 44,000 jobs. When you consider that this $7 billion, 8 year job-creation figure is lower than the job numbers being promised by some slickly-marketed EB-5 projects seeking several hundred million in China, it’s a bit sobering. Do we really expect that a particular megaproject will hit the surreal job numbers they project? It isn’t about IMPLAN vs. RIMS II; it’s about truth vs. lies, and, collectively, our credibility with the Chinese has never been lower. The fact that you got ten times as many jobs because you are telling your investors that you are going to build ten hotels at one time isn’t dishonest econometrics on the part of the economist; it’s faulty fundamental data. Build your first hotel with the real numbers, then go to number two, but let’s spare them your world domination plans for your new franchise of whatever it may be.

The other thing they want are real projects; they aren’t interested in capitalizing your pipe dream and they are WAY too smart to believe the inflated property values upon which your valuations are premised. Middle class SFH residential developments in markets with existing 3 year “For Sale” inventories?? Get real! The wealthy Chinese got wealthy because they invest in core industries which are tangible: mining (like Lake Point EcoVentures, which I am proud to say was fully susbscribed during my three week tour with Sharon) and manufacturing. Core businesses which consist of more than slick architectural drawings, jaw-dropping projections for unproven technologies, and six-digit Googleword/Baidu promotional budgets.

Sharon and I are working very hard to educate our partners in China about what makes a good EB-5 opportunity. There are very few of them out there, unfortunately. Congress wanted the EB-5 to be a fair exchange: invest in American jobs and get your U.S. residency. For many in the U.S., that has translated into one-sided opportunism, not the quid pro quo contemplated via Congressional Intent.

Until America provides China with a steady stream of what their capital appetite seeks, we will continue to lose ground to other nations with more progressive, attractive and responsive investor visa structures.

Wednesday, November 2, 2011

Day 3 in Shanghai, off to Saigon tomorrow. Another set of incredible meetings with incredible people cherry-picked by Sharon Shi. China is happening and the notion of a straight-shooting EB-5 program is a breath of fresh air to a hungry market. My expectations have been blown out of the water on all counts. Expect LatourLaw's Shanghai office opening early next year. I may not know a damn thing about Chinese law but my partner and her good friend Stella sure do...(-;

Feeling quite exotic these days, so we are heading to what sounds like the perfect place to wrap up business on the Bund: